Netcall PLC

Netcall PLC (LON: NET) is an FTSE AIM All-Share listed provider of intelligent automation and customer engagement software.

Rationale for Valuation – SPECULATIVE BUY at GBX 59.00

• Improved GDP: Britain’s economy surged more than anticipated with 0.8% month-on-month growth in January 2022.
• Solid Platform to Capture Growth: Following the strong performance in FY21, Netcall continued the strong trading momentum in H1 FY22. It witnessed robust demand for its cloud solutions across its core sectors of financial services, healthcare, and public sectors. Moreover, the pipeline of opportunities is growing with Netcall's Liberty platform, new business wins, and ongoing migration to cloud solutions.
• Stronger Profitability: In H1 FY22, Netcall reported better gross margin and return on equity than the industry median of 81.4% and 4.6%, respectively.
• Growth Drivers: Netcall has solid recurring revenues, a robust balance sheet, excellent cross-selling opportunities, and a growing pipeline.
• Improved Dynamics: As the activity level for the private sector picked up fastest in February 2022 since June 2021, the UK Composite PMI’s headline output index rose from 54.2 in January 2022 to 60.2 in February 2022.
• Positive Outlook: The Board showed confidence in the trading of the second half due to continued positive momentum, the accelerated growth rate of the annualized contract value, and significant market opportunities.
• Technical Indicator: From a technical standpoint, NET’s stock price is trading around the lower Bollinger band, while 14-day RSI (~10.02) reflects an oversold scenario.

Key Risks

• Ukraine Tension: The mounting concern over the Russian invasion in Ukraine, and subsequent sanctions from the West can continue to weigh on the equity market.
• Weak Macroeconomic Conditions: After the Covid-19 pandemic, there is acute pressure on consumer disposable income levels amid inflationary market conditions. Moreover, the supply chain disruption could also increase the operating cost.

Interim Results (for the six months ended 31 December 2021, as of 23 February 2022)

(Source: Company Website)

• Robust Trading: During H1 FY22, NET continued to trade strongly on the back of solid contribution from Cloud services.
• Strong Demand: The client retention rate surged to 119% in H1 FY22 (H1 FY21: 115%), while the cross-selling opportunities also expanded the customer base.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative)

*Peers: Quartix Technologies PLC, Oxford Metrics PLC, and Zoo Digital Group PLC.

*All selected peers are LSE-listed Companies from the Technology sector.  

Conclusion 

Based on the financial growth, robust pipeline, and favourable valuation methodology, we have given a “SPECULATIVE BUY” stance on Netcall PLC at the closing market price of GBX 59.00 (as of 11 March 2022), with a lower-double digit upside potential based on 41.37x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.). The stock has been covered at a closing price since it has not traded on 14 March 2022 (as of 1:32 PM GMT).  

Nevertheless, markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Note 5: ‘Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.’ 

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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